I was reading the Wall Street Journal this morning, and guess who was featured? It was our own Sunny Sarkar explaining how he keeps banking costs low. This is the part about Sunny:

Alternatives to Banks
Bhaskar Sarkar, a software engineer in Flower Mound, Texas, has stopped using banks altogether. Instead, he parks his cash in a brokerage account at Fidelity, where he is using a municipal money-market mutual fund as his core account. While most brokerage accounts have cash-management features, such as check writing and bill paying, Fidelity's checking-account equivalent, dubbed "mySmart Cash," also offers ATM-fee reimbursements and a no-fee overdraft policy.

By linking the two accounts, Mr. Sarkar is able to withdraw cash from any ATM and have the money pulled from his brokerage account -- all without fees. He aims to keep all of his cash in the money-market fund, where he's earning more interest, and a zero balance in his my Smart Cash account.

Compared to a traditional bank checking account, says the 38-year-old Mr. Sarkar, this arrangement is "more like a no-strings-attached account where I could keep as little or as much as I wanted in it."

Sorry I think his approach is risky and not very smart. What happens when Fidelity stops honoring the Money Market fund dollar account for some reason? Suppose they have a cyber attack. Suppose they break the buck for some reason? What happens to their internet accounts while they fix internet issues in town? What happens when Fidelity or his other brokerage gets slammed with a digital smart bomb via the internet and all the records are messed up? Where is this guy going to get money for groceries on the weekend when the Fidelity network does not honor his ATM requests and the office is closed for a few days to fix the mutual fund mess that Vanguard just predicted?

A far superior way to handle cash is a local cash bank account at a branch near you with a teller and bank manager you know. Yes it is more expensive but much better and much lower risk for real cash needs. You get what you pay for. Plus if there are any kind of cyber problems in the future you know these people and they have paper and electronic records at each branch so you can still get real money anytime on any day. You know the Yogi thing, money is the same as cash!

Plus when you establish a banking relationship with a bank branch near you you may find help that will last you a life time and may provide extra service when you have stressful issues or need a loan. Try getting a car loan or a small business loan or a real estate loan from Fidelity. And if you have the extra cash I suggest you bank at two different banks, like Wells Fargo and Chase or BofA for example. In todays goofy shadow bank world a real full services bank with real stringent government audits and real US government FDIC insurance is the only long term safe approach. Any other approach is risky, subject to the bailout whims of XYZ and subject to vast cyber attack and shutdown and loss of funds for a short time or even a long time while they sort out the issues.

If we had forced some of these banking safety concepts on the shadow bank world we would not have the problems that are shaking the world.

When Kyle Halkola walked into the TD Ameritrade office in suburban Schaumburg this summer he had a certified check in his hand and one thing on his mind.

With the financial markets threatening to implode, he just wanted a safe place to park $850,000 in cash.

Halkola had made the money over 20 years, buying and selling three homes in San Diego. When he landed a job near Chicago, he pulled out his equity and planned to buy a dream house for his wife and two young children in the Northwest suburbs.

Today, Halkola is one of hundreds of angry TD Ameritrade customers whose almost $1 billion in assets are frozen in a short-term bond fund called Reserve Yield Plus, a mutual fund managed by The Reserve in New York but largely distributed under a revenue sharing agreement with TD Ameritrade in Omaha.

Clients say TD Ameritrade misrepresented the fund as either an ultrasafe money market fund or something just as secure. And they have cried foul over the relationship between Ameritrade and The Reserve, suggesting it created a conflict of interest.

The Reserve, which operates the nation's oldest money market fund, gained global notoriety in September when its $785 million exposure to the Lehman Brothers bankruptcy caused its flagship Reserve Primary money market fund to "break the buck"—industry parlance for falling below the fund's purchase price of $1 a share.

"My wife's and my life savings has been frozen since Sept. 16," said Ted Gray, a Chicago native now retired in Nevada who lives on the income from $700,000 now in Yield Plus. "We can get by for a couple of months, but then we're in trouble. We're scared silly."

Yield Plus fund had many of the signature characteristics of a money market fund. It allowed investors to move money in and out quickly and sought to maintain a $1 share price, which is unusual for a short-term bond fund. Moreover, clients said, when TD Ameritrade representatives recommended the fund, they highlighted its money market-like qualities, not its added risks, suggesting it provided safety at a higher yield.

Last edited by Kenster1 on Wed Nov 12, 2008 5:03 pm, edited 1 time in total.

SURGEON GENERAL'S WARNING: Any overconfidence in your ability, willingness and need to take risk may be hazardous to your health.

btenny wrote:Where is this guy going to get money for groceries on the weekend when the Fidelity network does not honor his ATM requests and the office is closed for a few days

Who goes to an ATM to get cash to buy groceries? I use a credit card for nearly everything. So unless you foresee an entire credit card billing cycle where your cash is inaccessible, I don't think its much of a risk.

I never really understood the logic behind seeking FDIC insurance. I need insurance only for something that I know is a risk which I can't afford. If I seek FDIC insurance in a bank account, it follows that I'm putting my money at risk knowingly - which is true because banks don't ever tell me what they're going to do with my money, like whether or not they will use my money, say, to gamble on sub prime mortgages with a 30x leverage. It seems more rational to avoid needing FDIC insurance at all by choosing not to put my money in danger in the first place - i.e. avoid opaque bank accounts.

I feel safer in high quality money market funds because they tell me where my money is invested, and accordingly I can make an informed decision about whether or not to put my money in it. If Fidelity forced me into a junk bond MMF in the core account, I'd look somewhere else, but I do not lose sleep over a good muni fund. If a decent muni fund scared me, how'd I ever invest in equities?

Sunny wrote:I feel safer in high quality money market funds because they tell me where my money is invested, and accordingly I can make an informed decision about whether or not to put my money in it. If Fidelity forced me into a junk bond MMF in the core account, I'd look somewhere else, but I do not lose sleep over a good muni fund. If a decent muni fund scared me, how'd I ever invest in equities?

Do you think you would have spotted the problems with Reserve Yield Plus, as mentioned by another poster above? That's a real question, not a rhetorical question.

The Fund is a diversified mutual fund, designed as a convenient complement to the investment of temporary cash balances in short-term money market accounts or instruments. WHILE THE FUND IS NOT A MONEY MARKET FUND, IT SEEKS TO MAINTAIN A STABLE $1.00 SHARE PRICEAND THERE CAN BE NO ASSURANCE THAT THE FUND WILL BE ABLE TO MAINTAIN A STABLE NET ASSET VALUE OF $1.00 PER SHARE. The Fund seeks to provide higher returns than money market funds and other short-term investments.

and

Unlike the Fund, money market funds are subject to conditions in a Securities and Exchange Commission (“SEC”) rule
that are intended to stabilize a money market fund’s net asset value at $1.00. These conditions are intended to limit risk in a money market fund’s portfolio in the areas of credit quality, diversification and maturity of fund investments. Money market funds are generally required to hold high credit quality dollar-denominated securities (i.e., rated in the two top
categories by rating agencies), maintain a diversified investment portfolio (e.g., not invest more than 5% of its assets in securities of any single issuer, except the U.S. federal government) and invest in securities that are considered short-term (i.e., average portfolio maturity to be 90 days or less). Although the Fund seeks to maintain a $1.00 share price, it is not required to comply with this SEC rule and therefore the Fund is a riskier investment than a money market fund.

Yield Plus was created to serve as a complement to money funds. The Fund provides investors the daily liquidity of a money fund and the enhanced yield of an ultra short-term bond, while attempting to avoid NAV volatility

Like Sunny, I had most of my cash holdings in a muni money market fund. But having seen the turmoil in the credit markets in the last month or so, I have made my muni money market fund a much smaller percentage of my cash holdings. I think it does make good sense to diversify.

I keep almost all my cash parked in a MMF w/ VanguardAdvantage for all the same reasons. However, I also keep a small account at the local branch of a nationwide bank which is ACH linked to Vanguard. Sometimes I need the relationship with a brick and mortar bank for services like cash, notary/medallion signature guarantees, safe deposit box, wire transfers etc..

Disclaimer: nothing written here should be taken as legal advice, but I did stay at a Holiday Inn Express last night.

nisiprius wrote:Do you think you would have spotted the problems with Reserve Yield Plus, as mentioned by another poster above? That's a real question, not a rhetorical question.

I do not have any ability to spot trouble ahead of time, but based on the info you pasted in your post above, I would not have invested in the Reserve Yield Plus. The reason is very simple: it's opaque - it doesn't reveal what it's doing with my money. I'd be Ok with a money market fund only when they reveal what percentage of their assets are invested in what quality of debt, and if that composition seems acceptable.

My logic is simple: I wouldn't buy a bad car even if it comes with good "free" insurance, I'd rather buy a good car and save myself the aggravation.

Mas and others that have no cash around. I agree to use a credit card most of the time. But please carry some cash and have a cash stash.

Beware of the next real big event. When 911 went off the stock markets shut down for several days and communications in the New York area were also shut down for a similar time. No cell phones, no satelite, no ATM service and so forth. I do not live there but I bet you had lots of trouble using a credit card for groceries or other necessities in Manhattan and Brooklin, etc. for most of that week and maybe weeks. If they had been successful in hitting the White House or the Capital in Washington who knows how long various market and banks and charge systems whould have been off line.

So beware the next terror attack or cyber attack or big internet goof up or big earth quake (for those in California) or big tornado (for those in the mid west) that stops most non cash transactions in lots of places for many days. Or for those in the south maybe think about what happens after a hurricane and how much you can charge on a credit card when all the power lines and phones are out. So I suggest you stash some cash and carry some cash with you in case of such an event. It will happen to you in your life time at least once so be a Boy Scout and be prepared.

I agree with the need for safety. I just don't think that a muni fund that has 98% in highest quality debt is unsafe.

Between a low interest bank account with fdic insurance and another without the insurance, I'd of course choose the former. But between a low interest bank account with fdic insurance and a high quality muni fund with a relatively higher yield, I chose the latter.

Frankly, if there's a big emergency, I think having emergency food stores is going to be much more important than having emergency cash. I'd much rather hunker down and wait out any difficulties than try and be out buying groceries, even if I have to live on dried grains for a month.

Anyway, good for you, Sunny. Seems like a good system you have going there.

I feel safer in high quality money market funds because they tell me where my money is invested, and accordingly I can make an informed decision about whether or not to put my money in it.

I believe you are suffering from an illusion of knowledge. Sure, Fidelity lists all of the securities within the fund, but that doesn't mean you know anything about them or what the risks really are. Are you familiar with how Variable Rate Demand Notes and Tender Option Bonds function? What does it mean that the Tennessee Housing Development Agency VRDN's had a liquidity facility with Lehman Brothers? Was the fund relying on insurance from MBIA, Ambac, FSA, etc. when it purchased some of those VRDN's, but the insurance may no longer be there when it's needed?

There have been a large number of money market and bond funds that have been transparent in naming their holdings (as required by the SEC, of course). Nonetheless, a number of money market funds have needed bailouts from their sponsors and a number of bond funds have imploded.

My point is not that Fidelity money market funds are at special risk. My point is that unless you are highly knowledgeable about the muni fund market, you are not capable of identifying that risk, regardless of the stated quality of the fund or the fact that they provide a huge list of holdings every quarter.

Diversifying your cash is no less important than diversifying your equities. Breaking the buck in a money market would not actually be my primary concern. The freezing of an account with one company, for whatever unpredictable reason, is a concern. Putting all of your money is a single account is an avoidable risk that you are not compensated for.

btenny wrote:Mas and others that have no cash around. I agree to use a credit card most of the time. But please carry some cash and have a cash stash.

OK. Just for you, I'll carry around a bit of cash... but don't expect me to spend it until the scenarios you mention occur (or for purchases under $5).

Also, while I agree with the principle of diversification - even for cash availability reasons described - the probability of being impacted by such events is low. You probably do not take precautions against millions of other low probability events that could be worse (even fatal).

I don't understand why Sunny got a bunch of objections for putting some cash in a muni money market fund. We are not talking about life savings. It's just some working cash. If the fund breaks the buck, the loss is likely much less than the loss incurred elsewhere in the portfolio. If the fund is frozen, other assets can be liquidated. So what's the problem?

I use a Fidelity mySmart cash account and it's perfectly safe. I have it linked to a local credit union checking account in I case I ever want to deposit cash, but you can choose to put your money in a mutual fund or the FDIC insured core account, so I don't see any pause for concern. If you're afraid of a cyber attack on Fidelity that will take away all your money than perhaps you need to stash all your cash in a safe and maybe a bit of counseling.

tfb wrote:I don't understand why Sunny got a bunch of objections for putting some cash in a muni money market fund. We are not talking about life savings. It's just some working cash. If the fund breaks the buck, the loss is likely much less than the loss incurred elsewhere in the portfolio. If the fund is frozen, other assets can be liquidated. So what's the problem?

Sorry, I take it all back. I was under the impression that the money in the muni money market fund represented a substantial percentage of his cash holdings. And even if there was a problem accessing the muni fund, Sunny could always sell his stock assets to raise needed cash. No worries!

tfb wrote:I don't understand why Sunny got a bunch of objections for putting some cash in a muni money market fund. We are not talking about life savings. It's just some working cash. If the fund breaks the buck, the loss is likely much less than the loss incurred elsewhere in the portfolio. If the fund is frozen, other assets can be liquidated. So what's the problem?

Sorry, I take it all back. I was under the impression that the money in the muni money market fund represented a substantial percentage of his cash holdings. And even if there was a problem accessing the muni fund, Sunny could always sell his stock assets to raise needed cash. No worries!

To me, Sunny's post implies that a substantial amount of this cash (if not all) is in a muni MM fund due to his aversion to FDIC accounts. It's not just 10%.

O.k., fellow Bogleheads. Give Sunny a break. I think there is a generation gap here. The younger ones grew up in electronic and internet age and they are more comfortable with "paperless" society than those who grew up with paper in hand.

I am a late baby boomer and was among the first both in my family and among my peers to embrace electronic transfers, etc. I have received all kinds of warnings about the reliability and danger of doing funds transfers without actually using greenbacks or paper checks. But the world continues to march toward a less paper society. Paper or paperless, one still needs to exercise common sense in safeguarding account information, etc.

However, I do diversify my cash holdings by having a small checking account in a brick and mortar bank down the street. This allows me some flexibility to get a few fast bucks in a hurry. I actually like Sunny's way of cash management. It's not for everybody, but it appears to be good for him.

Not sure if Sunny is using the FDIC insured account or just a brokerage account. I'm 26, so have been paperless banking from almost the start. Once i found the fidelity my smart cash account I was happy with my banking needs and finally stopped switching banks. Also find Yodlee invaluable for organizing/tracking accounts (free as well).

I found out about the fidelity MySmart Cash account from the fatwallet finance forum, which has many similar minded folks to the bogleheads just focused on a different aspect of our financial lives. 0% credit card arbitrage and squeezing every nickle out of your cash are the major topics over there.

I use a very basic setup for the account with just that account open at fidelity. I keep a couple months living expenses in a money market fund held in the account. Anything beyond that I ACH over to vanguard. My pay direct deposits into the core of the account and I let a week or two of pay sit in the core. I pay all my bills through the fidelity bill pay or paper checks that draw on the account.

When bills are paid money comes out of the low interest core first, then it automatically draws from the money market funds held in the account. The core is FDIC insured on this type of account and you have a selection of fidelity money market funds to choose from, so you can pick what is best for you or hold a variety.

The current rate on the core is 0.60% and the MMF i picked is fidelity select which is at 2.84%. When i started the account i think the core was 2.5%+ and MMF was around 4.5-5%.

I've tried a lot of banks, and so far this has been the best for me. I haven't been charged a fee for anything, the things you use/consume are free to replace (checks, deposit slips, prepaid envelopes), and they rebate ATM fees (only use a couple times a year, but still nice not to worry about which ATM to go to).

A local bank would probably be prudent, but I didn't keep any open. Maybe a safe in the house with some cash for the disaster scenarios.

Cosmo wrote:To me, Sunny's post implies that a substantial amount of this cash (if not all) is in a muni MM fund due to his aversion to FDIC accounts. It's not just 10%.

I do not have substantial amount of cash - my AA does not call for any cash allocation outside emergency funds (hope never need to utilize) and home down payment (already utilized). Whatever money I'd normally keep in a bank checking and/or savings account is in this Fido MMF core. As mentioned in the article, it's just an alternative to having a bank account.

I'm not averse to FDIC insurance either. I just don't think it's necessary to insure a Muni MMF which does not invest in low quality debt. If the MMF was FDIC insured, I wouldn't get out of it due to some kind of aversion.

What got lost in this discussion of FDIC vs no FDIC is the fact that the driving force behind my decision to go bank free was not a quest for higher yield on checking account dollars, rather it was a quest for simplicity.

A couple of years ago, I made a post on the M* diehards forum observing that while my IPS calls for only a few funds (2 stock + 2 bond + 1 mmf), the tax code forced me/us to own quite a few different accounts; and other personal finance necessities like life insurance, credit card, checking acc, etc. have forced me to have relationships with several financial instututions and, in fact, made my whole financial life far more complex than I'd like it to be. That prompted me to make the following I-wish post on the forum...

I wish I could direct deposit my paycheck into a vanguard money market account (and have the cash available on payday) from where I could pay all my bills, write unlimited checks of whatever amounts however small, use my vanguard check card at the local grocery store like an ATM, set up auto payments to my vanguard life insurance policy, as well as pay my vanguard credit card which would give 1.5% cashback back to the money market account -- all this for free even if I am not a voyager or flagship level customer...

Am I correct in assuming that all this is possible at Fidelity, i.e. in addition to investment products, one can essentially get free internet banking from Fidelity?

That's where all this started. After that I gradually moved all my cash management to Fido. Today I direct deposit my paycheck into a Fido money market account (and have the cash available a day before payday) from where I pay all my bills, write unlimited checks of whatever amounts however small, use my Fido check card in any ATM for no fees, set up auto payments to my Tiaa-Cref life insurance policy , as well as pay my Fido credit card which gives 1.5% cash back to the money market account -- all this for free even if I'm not a millionaire. Even my home and auto insurance is with Fidelity (albeit just by name - Fidelity Insurance is a different company).

I **could** move all my investments to Fidelity too, but while their Spartan index funds sport low ERs, they're not quite as well managed as Vanguard index funds, and Fido's fixed income funds are decidedly inferior to Vanguard's. Someday I'll have VanguardAdvantage for no fees (and admiral shares too).